New York Amends Loan Originator Compensation Rules
by Nicole Legere, Esq.
Senior Counsel
New York has recently enacted several new amendments intended to clarify permissible forms of loan originator compensation. Specifically, these amendments address yield spread premiums (YSP’s) which are fees paid to the broker from the lender, and are often based on the terms of the loan. YSP’s were found to be confusing to borrowers, and often encouraged brokers to direct borrowers towards more expensive loan products in order to increase their compensation from the lender. The state hopes these amendments will prevent loan originators from steering a borrower towards a particular loan product which may be more expensive than other products for which the borrower also qualifies.
PERMISSIBLE COMPENSATION
Section 590-b of New York banking law was amended to add subsection 3-a, which eliminates compensation for those involved in the making or brokering a home loan where that compensation is based the terms of the loan. However, this section specifically states that it does not prohibit compensation which is based on the principal balance of the loan. Traditionally, mortgage brokers had been compensated with flat fees or fees based on the loan amount. In fact, the FDIC has recommended this type of compensation saying that it does not “present skewed incentive or increase borrower costs and would be much more transparent and understandable to the borrower.”
YIELD SPREAD PREMIUMS
Additionally, two sections of New York banking law dealing with YSP’s in cases of high cost and subprime home loans were also amended. In the past, borrowers were able to use YSP’s to offset any upfront costs by accepting a higher interest rate, as long as any compensation which exceeded the amount owed to the broker was credited to the borrower. The broker was responsible for disclosing the exact amount and method with which the compensation would be determined. This disclosure had to be given to the borrower within three days of receipt of the application. However, these new amendments have eliminated YSP’s stating that “in connection with the making or brokering of a home loan, no person may provide, and no mortgage broker or mortgage lender may receive, directly or indirectly, any compensation that is based on, or varies with, the terms of any home loan.”
These new amendments are effective immediately and can be read in full on AllRegs at: http://www.allregs.com/ao/main.aspx?did2=702fd5e4f3d848d18d03a00f4767ed5e
About the Author
Nicole is Senior Counsel at Bankers Advisory. She received her Juris Doctor from Roger Williams School of Law and is admitted to the Bar Associations of the State of New York and Massachusetts. She can be reached at nicole@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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